Options work just as well in a down market. The option quote table below contains precise put option costs (courtesy of Yahoo Finance) for Hewlett Packard (HPQ). Buying put options is a bearish technique as the value of a put option increases as the price of the base stock decreases. Hewlett Packard stock is at present trading at 32.78. Let us assume that HPQ stock declinesin price 10% from 32.78 to 29.50. Let’s target the March 30-Strike put option (circled).
Chuck Hughes Proven 10% Stock Price Reduce = 900% Option Return
Purchasing the 30-Strike put option gives us the prerogative to sell 100 shares of HPQ at 30.00. If we were to purchase the 30-Strike put option we'd expect to pay the ‘ask ‘ cost of .05 cents or $5 per option (.05 x 100 shares = $5). Let’s assume HPQ stock decreases 10% in price from the existing cost of 32.78 to 29.50. With a stock cost of 29.50 the 30-Strike put option would be worth .50 points or $50 (strike price of 30.00 minus 29.50 stock price = .50 option value). When you get options you can sell them anytime prior to option expiration. So that the option we bought for .05 points might be sold for .50 points. Selling the 30-Strike put at .50 would produce a 900% return (.50 sale price minus .05 cost = .45 profit divided by .05 cost = 900% return).
Option Profits Come From Stock Price Movement
You can recall from our prior debate that options are derivatives that derive their worth from the price of the essential stock. The intrinsic cost of a call option will increase one point for each point its underlying stock increases above the strike cost.
A lot has been published about option methods that invest in options based primarily on whether an option is under valued or over valued according to the Black-Scholes Pricing Model. These option strategies are really complex and require high-level mathematical calculations to compute an option’s Alpha, Beta, Delta, Gamma, Theta etc. I never understood the logic of making an investment in a choice because it was slightly below valued at the time of purchase. Under valued options can become more under valued. The price movement of the fundamental stock decides an option’s worth and the resulting profit/loss. When you buy a call option your profits are decided by the price movement of the underlying stock.
Let’s refer again to the example for the Hewlett Packard 35-Strike call acquired at .10 points so you completely understand this crucial concept. The table below obviously demonstrates that the cost of HPQ stock determines the profit/loss of the 35-Strike call option. If we are able to select a stock moving up in price, getting a call option on that stock can produce enormous profits and will allow us to harness the amazing leverage provided from option investing.
Contemporary MVP Call Option Purchase Example
The Trend Line Methodology measures the purchasing and selling pressure for a stock which enables us to grasp ahead the most probable future price direction of a stock. Mixing the Trend Line Plan with the New High and Price Level Trend Confirmation Indicators results in a superb system for buying call options on stocks that are moving up in price.
The brokerage confirmation below shows that I purchased 9 of the Precision Castparts (PCP) 115-Strike call options at 5.20 and sold them 5 weeks later at 18.50. This led to an $11,945 profit with a 254% return after allowing for commissions. I selected this trade utilizing the Trend Line Strategy in combination with the MVP Trend Confirmation Signals. Precision Castparts was in a Trend Line Strategy buy mode and was in a leading industry group. It was also making New 52-Week Highs and was trading above 70 at a Price Level Confirmation.
MVP Option Methodology Produces
$1,044,065.26 Profit with No Losing Trades
My trading account statements that follow show $1,044,065.26 in profits with no losing trades. The average return was 88%. I made use of the MVP Option Method and Option Spread System to generate these profits. We'll cover option. Spreads in Chapter 7.
Note: The profit for a spread trade is worked out by combining the profit/loss for the long and short position to derive the net profit for the spread
The Appendix contains copies of my brokerage statements that confirm my $1,023,174.93 profit in 26 days utilising the MVP Option and MVP Option Spread Strategies. There are also copies of brokerage statements and tax returns for an extra $1,936,445.72 profit John and I made trading the MVP Option and MVP Option Spread Methods.